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What Happens When $125B Liquidity A Month Ends?

With many once again believing that a rate hike is just around the corner (as has been the case for the past 2 years… the same with expectations that NFPs will finally push higher any month now), here is a reminder of what happened the last time there was a concerted effort by the Fed to contract liquidity. And this is just hiking rates. Never before has the US stock market had to ween itself off $125 billion in QE-related monthly liquidity. All in all, no matter how long Bernanke tries to delay the end of QE2, the outcome will become a self-fulfilling prophecy which will slam stocks, and by the Chairman’s definition, the economy, making a QE3 episode inevitable (not to mention the $2 trillion in debt each year that has to be monetized). We are on the same side of the Peter Shiff bet who has given Steve Liesman 5 to 1 odds for $10,000 that QE3 is imminent.

A Strong US Economy

February 10, 2011

By John R. Taylor, Jr. Chief Investment Officer

When it comes to the US economic outlook, we seem to be among the most pessimistic out there as our more optimistic view sees a staircase decline, with the picture deteriorating each quarter: 4%, 3%, 2%, and 1%. We are feeling a bit sheepish as last summer we had called for the economy to go into recession during this quarter. Although that was before Jackson Hole and the deal that Obama crafted with the Republicans in December, we didn’t envision those further stimuli and we should have. Somewhat stubbornly, we still see these fiscal and monetary boosts losing their power as the first half comes to an end and doubt that the US consumer, capital spending or trade can pick up where Washington lets off. Those who told us that one should never bet against the US consumer have been right so far; and as credit card debt expanded in December for the first time in two years, we can see they could be right all year. The credit market seems to be sensing the same thing as it is now projecting the first Fed hike in December, with the second one next March. Our credit market cycles call for yields to rise for another few weeks and possibly into late April. If long-rates really move up, the date of the first Fed hike could get much closer.